After an inglorious 2016, many pundits jawbone about a continued investor exodus from the so-called overpriced and underperforming hedge fund industry. However, the facts are in stark contrast to the rhetoric. January 2017 redemptions total $5.2 billion, about one-quarter of the $19.3 billion outflow the hedge fund industry experienced in January 2016. Furthermore, a substantial percentage of the monies redeemed were reinvested in hedge funds with superior performance records. We know this to be true, because year over year hedge fund AUM continues to rise, and presently stands at $3.018 trillion.
Painting the hedge fund industry as being in a death spiral is like saying the sun will burn out in 5 billion years. Undeniably, a number of hedge funds are underperforming—a small number will fail, but this has always been so.
Credit Suisse Delivers Positive News
In its ninth annual Hedge Fund Investors Survey, 87 percent of 320 institutional investors representing $1.3 trillion in hedge fund investments, indicated they would maintain or increase their hedge fund exposure in 2017…this is the same percentage reported in Credit Suisse’s 2016 survey.
Some of this willingness to stay the course may be attributed to the fact that 57 percent of these investors reported receiving fee reductions in the past twelve months. Additionally, 61 percent of the survey’s respondents reported having at least one manager in their portfolio with a hurdle rate. This confirms a trend between investors and hedge fund managers in which they continue to achieve a better alignment of terms.
What Drives Redemption?
As one might expect, the main driver of redemption, according to 80 percent of survey participants, is underperformance. Fifty-two percent of respondents cited strategy drift and individual investment manager turnover as drivers.
Interestingly, just 30 percent of the survey’s respondents felt that their hedge fund met or exceeded expectations, a 15 percentage point reduction from last year’s 45 percent. This is worrisome. Either expectations are elevated or hedge funds are performing more poorly. The aggregate gains for hedge funds in 2016 as compared to 2015 would suggest the former, not the latter.
What Are Investors Looking for In a Hedge Fund?
Investors surveyed are looking for returns net of fees, non-correlation with existing investments and core team stability coupled with proven risk management skills, in that order.
The Forecast Is Growth
While the Credit Suisse survey is replete with insights, the most heartening takeaway is investors predict a 3.5% increase in inflows during 2017. If this materializes, we will see hedge fund AUM rise by around $106 billion at year-end.
Hedge Fund Jobs
The Credit Suisse survey is great news for those seeking employment in the hedge fund industry. Growth will certainly enhance demand. The survey indicates that the most sought after hedge fund strategies are Global Macro-Discretionary, with 26 percent of those surveyed indicating a preference for this strategy, followed by 18 percent opting for Fixed Income Arbitrage/Relative Value and another 18 percent favoring an Emerging Markets-Equity strategy. It follows that employment opportunities will be greater in firms following one of these three strategies.